The Wall Street Con Now Shredding Our Economic Future

Sam Pizzigati Editor, Too Much online magazine

Imagine yourself sitting in a corporate chief executive suite. You run a Fortune 500 corporation, and you’re facing the biggest decision of your career. Lawmakers have just enacted the largest corporate tax cut in world history. Hundreds of millions of unexpected dollars, maybe billions, will soon be pouring into your corporate coffers.

The immediate question for you, the CEO: What are you going to do with this incredible windfall?

You have options, plenty of options. You can invest your golden windfall in new plants and equipment. You can put money into R&D and create exciting new products. You can retrain your workers and reward them — with higher pay — for their increased productivity.

All reasonable choices. Which would you pick? Or would you choose some combination of all three?

In real life, America’s top corporate executives are facing exactly this same set of choices. And they’re picking . . . none of the above!

These execs are choosing instead to devote a huge chunk of their windfall to “stock buybacks.” Instead of investing in their corporate long-range future, they’re shelling out billions buying back shares of their own stock on the open market.

Last year, U.S. corporate outlays for buybacks totaled $800 billion. The buyback pace this year has quickened, as top execs rush to “invest” the savings they’re realizing from the GOP corporate tax cut enacted last December. In May alone, corporate CEOs bought back $174 billion worth of their shares, “an all-time record” for a single month.

None of these buyback billions will make America’s corporations more creative or productive. What will these buyback billions do? They’ll simply, as Pulitzer Prize-winning business journalist Steven Pearlstein noted last week, redistribute “even more of the nation’s wealth to corporate executives, wealthy investors, and Wall Street financiers.”

Buybacks have one goal and one goal alone: hiking a company’s share price by increasing demand for a company’s shares. Just announcing a buyback can give shares a big boost.

And America’s top executives have learned how to get the most — for themselves — from that boosting, as detailed in new research from the Securities and Exchange Commission, the federal watchdog over Wall Street.

SEC researchers have examined 385 recent corporate stock buybacks. They’ve found that top corporate executives, explains SEC commissioner Robert Jackson, typically sell less than $100,000 worth of the company stock they personally own in the days leading up to a buyback announcement.

Right after that announcement, by contrast, execs on average sell $500,000 worth of their own stock holdings. Top execs, says the SEC’s Jackson, “personally capture the benefit of the short-term stock-price pop created by the buyback announcement.”

“We need our corporations to create the kind of long-term, sustainable value that leads to the stable jobs American families count on to build their futures,” adds Jackson. “Corporate boards and executives should be working on those investments, not cashing in on short-term financial engineering.”

How can we get corporate execs to focus more on creating that “long-term, sustainable value”? We could, for starters, kill the 1982 SEC regulations that let stock buybacks become standard corporate operating procedure. Before then, regulators had considered buybacks a form of stock manipulation that had no place on Wall Street.

Two members of Congress — Rep. Ro Khanna of California and Rep. Keith Ellison of Minnesota — have just introduced legislation that would essentially undo the 1982 regulatory changes and prevent companies from buying back their own shares. Companion legislation, introduced by Tammy Baldwin of Wisconsin, is pending in the Senate.

All this legislation, if enacted, would surely slow the CEO pay gravy train. But that gravy train will continue rolling, Keith Ellison understands, so long as top corporate execs have no significant checks on their power and capacity to extract from America’s economy as much wealth as they can grab.

What sort of significant checks could stem this greed grab? Ellison suggested one earlier this year. He asked his fellow lawmakers to start considering the notion of a “maximum wage.”


Reposted from Inequality

Sam Pizzigati edits Too Much, the online weekly on excess and inequality. He is an associate fellow at the Institute for Policy Studies in Washington, D.C. Last year, he played an active role on the team that generated The Nation magazine special issue on extreme inequality. That issue recently won the 2009 Hillman Prize for magazine journalism. Pizzigati’s latest book, Greed and Good: Understanding and Overcoming the Inequality that Limits Our Lives (Apex Press, 2004), won an “outstanding title” of the year ranking from the American Library Association’s Choice book review journal.

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